XXV Edition

1-2 December 2016"

Market Reactions to the Implementation of Banking Union in Europe

Pancotto Livia, Bangor University
ap Gwilym Owain , Bangor University
Williams Jonathan , Bangor University

This paper provides evidence on the financial market impact of the implementation of Banking Union in Europe. Using an event study approach, the analysis focuses on the effect of the overall regulatory reform, and the associated individual announcements, on banks’ share prices and CDS spreads during the period 2012-2014. Announcements related to the implementation of the supervisory component, as well as those on the new resolution rules, had a detrimental effect on the wealth of banks’ shareholders. In contrast, the market response to sub-events connected to the ECB’s 2014 Comprehensive Assessment was markedly positive. Banks’ CDS prices reacted in a symmetrical fashion compared to the evidence reported for the stock market. Furthermore, when considering the CDS market, the specific category of Global Systemically Important Banks (G-SIBs) were shown to significantly react to the implementation steps in the Banking Union. Cross-sectional analysis reveals, for the stock market, positive associations of the cumulative abnormal returns with capital levels and with the business model orientation. Relating to the CDS market, the degree of capitalization, generally in a negative association with the level of CDS spreads, revealed a positive influence for the G-SIBs. Weak credit quality is also a relevant factor in explaining abnormal increases in quoted CDS spreads.

Area: Financial Regulation and Supervision

Keywords: European Banking Union; Regulatory change; Market reaction; CDS spreads; Event study.

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